The 10th Surprise
When you go to a Chinese mall, you haggle to the last cent. I remember being rudely pulled aside and being told by a Chinese vendor at a mall in Shanghai that I had no right to bargain any further and that I would have to take the little bag that I had picked. Shocked, I walked away with the item at his initial price. When the 10th budget of our Honourable Finance Minister was being announced, I felt like what I had felt in the Shanghai mall years ago. The only exception was that our honourable Finance Minister was not a Chinese vendor and all I hope is that he will have more empathy for the average readymade manufacturers than what he reflects in his 10th plan. If he expects the manufacturers to begin pleading with him to bring down the source tax from 1.5 percent, then we have no steam to do so. It is impossible to bargain for life when the death sentence has already been announced. And in order to enter into a plea bargain for a life sentence is not a rational expectation.
A little detail will help clear the scene. Currently. the source tax stands at 0.6 percent. In case a small factory of four lines sells shirts for US$4.00 per piece, and makes 100,000 pieces a month, then on a yearly basis, the source tax for that small factory used to come to around Tk. 23 lakhs on a yearly basis. Today, if the source tax is increased to 1.5 percent, it will automatically become Tk. 57 lakhs. The extra $42,000 would impact the CM (cutting and making) charges and per piece cost would have to increase by at least 5 cents. Does the honourable finance minister really think that an average factory will be able to afford or negotiate this? My guess is that most of us from the sector may have risen our voices against the irrational corporate tax of 35 percent. Having done that, the FinMin has very kindly considered that and as a result, most of the big manufacturers will be able to save on taxes. But for those who don’t have huge exports and do not have bigger factories, will bleed to death.
Why should source tax be lessened to 0.3 percent now?
1) Exports not growing as expected:
Bangladesh’s RMG sector is facing serious uncertainty, as our exports are not growing at the rate we expect it to grow. As for the US, the latest figures from the US’ Department of Commerce’s office of Textiles and Apparel (OTEXA) indicates that the volume of US apparel imports from all sources has declined by 1.6 percent year-on-year in April. As for the individual suppliers, China has registered a 10.2 percent growth and export to US with Vietnam recording a 5.9 percent to 244m SME (square metre equivalent), and Bangladesh ranked third with a decline of 7.4 percent to 140m SME. Overall US import was down by 4.2 percent in April on a year-on-year basis.
2) Still not competitive when it comes to supply base and skills:
Bangladesh has a long way to go to achieve standards that China has when it comes to product efficiency and capacity. Betting on 4,322 factories to take Bangladesh to a $50 billion mark by 2021 is a long shot, especially when no new entrepreneur will be encouraged to invest in RMG with taxes soaring as they are, whereas China will maintain its lead over world manufacturing for the next two years, as the latest Caixin China Manufacturing Purchasing Manager’s Index (PMI) rose to 49.7 percent in March from 48 percent in February.
3) Costs of production increasing in Bangladesh:
Every factory has been experiencing additional production costs because of the compliance requirements. Even a small factory of four production lines is incurring at least half a million dollars to implement the bare minimum requirements of compliance. This will directly impact the manufacturer’s pocket. To put it simply, in a year, a manufacturer of the four lines factory is having to take a hit of 41 cents per piece for only remediation. Where is this extra money going to come from?
4) The sector needs to diversify into value added products:
For this, Bangladesh needs a Technological Upgradation Scheme (TUF) set up by the government so that the sector transitions to a better manufacturing phase. Instead of providing assistance to skill and product up-gradation, if the sector is slapped with taxes that impact average manufacturing units, then exporters would lose their zeal, and there would be no further incentive to either enter or sustain in this business.
The Honourable Finance Minister needs to be kindly told that the year on year costs of RMG has gone up and while the big exporters (maximum 200 factories out of total 4,322 in number) enjoy the cut in the corporate tax, the manufacturers of the next tier and the smaller ones will suffer the most. We all need to remember that it is not the big factories that support the economy, rather it is the toil of many small manufacturing units that keeps the economy alive.
The readymade garments sector is always being showcased as the perfect poster child of Bangladesh. All the talk about three million women being employed by the sector and the 80 percent contribution to national export figure and all that have become a staple content of an international conversation. But when it comes to real promotion and incentives, the sector is given the least consideration and attention.
As a part of the promotion, there was a trade expo in Bangkok just a week ago. With the trade deficit soaring between the two countries, it was an initiative that nevertheless deserves mention. The current trade volume stands at $27.10 million in 2015, which can easily be quadrupled if in case there is direct coastal link and if, just if, the import tariff on apparel in Thailand is slashed with consideration. The expo also featured a beautiful fashion show by designers from Bangladesh who flaunted silk and muslin. While I watched the show and took pride in our heritage, a part of me sank to new levels as when on one hand Bangladesh was being promised as the next land of choice for apparel sourcing, on the other, unfriendly and unforgiving policies will finally kill the goose that at least has been laying silver eggs till date. The readymade garment sector needs to be nursed back to health and not be put on a crucifix at a budgetary altar of sacrifice. A sector that has grown from an export of $35 million in the 80s to $25 billion today, a sector, which has grown from 384 factories to 4322 in less than four decades, can perform miracles if only the government stands by its side.